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The Supreme Court yesterday agreed to hear a case to determine whether states can use tax incentives to attract businesses in a major test of economic development policies.

Tax incentives are used extensively by Maryland, Virginia and at least 35 other states.

They also are likely to play a role in Gulf Coast reconstruction in the aftermath of Hurricanes Katrina and Rita. Mississippi Gov. Haley Barbour convened a special legislative session yesterday in which tax incentives are being considered to attract developers.

The Supreme Court case will review an Ohio tax program that an appeals court ruled last year unconstitutionally interfered with free trade and Congress’ authority to regulate interstate commerce.

A group of homeowners and small businesses sued over a $281 million investment tax credit Ohio gave DaimlerChrysler AG to build a $1.2 billion Jeep assembly plant in Toledo, which opened in 2001.

They said Ohio taxpayers unfairly footed the bill for fierce bidding wars between states for new businesses.

Aris Melissaratos, Maryland’s secretary of Business and Economic Development, agreed the competition between states is intense, but said tax incentives can make the difference in whether a state wins a new employer.

“They are extremely important,” Mr. Melissaratos said. “We all have what we call a tool kit of incentives, and the tax incentives are probably the most affordable and the most powerful.”

In the last year, Maryland granted up to $5.5 million in tax incentives to American Woodmark Corp. for a new plant in Allegheny County slated to create 500 jobs. Dreyer’s Ice Cream Inc. was given $300,000 in incentives for a Howard County plant expected to create 300 new jobs.

Typically, the incentives are tied to job creation, such as $1,000 in tax breaks to Dreyer’s for each new job.

Tax incentives also were used to attract Discovery Communications Inc. to downtown Silver Spring and to build Human Genome Sciences Inc.’s newest manufacturing facility in Rockville.

“We do a return on investment study on all of those to make sure it’s a good business deal for the taxpayers,” Mr. Hall said.

He described the competition between states as being “like an arms race.”

The 6th U.S. Circuit Court of Appeals in Cincinnati ruled that state and local tax breaks “hinder free trade among the states.”

The ruling also said tax breaks violate the authority given to Congress by the Constitution’s Commerce Clause “to regulate commerce … among the several states.”

The lawsuit was filed by homeowner Charlotte Cuno, Kim’s Auto & Truck Service and other Toledo property owners.

Miss Cuno’s lawyer said in a court filing that “a clear statement of the unconstitutionality of discriminatory state tax incentives will free all the states from the necessity of engaging in an escalating competition over incentives that deprives them of needed revenues, while gaining a meaningful competitive advantage for none.”

However, DaimlerChrysler AG attorneys referred to previous Supreme Court rulings in their brief that said, “nothing in the Constitution prevents a state from competing with other states for a share of interstate commerce. Such competition lies at the heart of a free trade policy.”

Although the Supreme Court struck down a New York franchise tax credit in 1984, it never has never spelled out what incentives states can give before they interfere with the Commerce Clause.

The Supreme Court is scheduled to hear the case early next year with a decision by June. It is expected to clear up similar court cases involving tax incentives pending in other state courts.